Gilbert and George consider themselves martyrs to a soulless society, The Dirty Words Pictures are their Stations of the Cross. Made in 1977, they exploit aggressive graffiti daubed on east London walls - 'wanker' and 'queer' and 'fucked up' - and try to construct little personal and political allegories from their implications. Considered too shocking to show in this country at the silver jubilee, and never collected together before, the 26 resultant tableaux are a time capsule from the anarchic posturing of that year. They marked, too, an about-face in G&G's lock-stepped career: where previously they had been happy enough to toy with a private sort of frank absurdity, this work looks like a more earnest stab at social realism.

As ever, though, it is as much about the artists as about their times. Each of the pieces uses a grid of 16 or 24 blown-up images, headed by a chopped-up photograph of an aerosol-ed expletive. The remainder of each grid organises - in black and white or blood-red - images of the capital's streets, choreographed for their sense of alienation. The stiff duo themselves, in typically expressionless but usually mournful self-portraits, occupy at least a couple of these frames.

By placing themselves at the heart of this work and surrounding themselves with the greed and grimness they saw about them, the artists hope to appropriate a kind of despairing innocence, but the work is probably a little too knowing for that. While the distancing ironies and the honest fun of taboo-breaking gave pieces like the early Magazine Sculpture with its labels 'George the cunt and Gilbert the shit' a winning comedy, here the pejoratives are meant. You've never had it so bad, these pictures suggest, and what's more it's going to get worse.

They were prophetic at least. The series acts as propaganda for a point of view that was not common currency at the time, but which came to be the story of London in the next decade: an undirected sense of the polarisation of wealth and the resultant loosening of the ties that bind us. The Tory-voting duo employ their grid to isolate their subjects, already lonely in the crowd, still further. When people appear in these frames, eyes never meet; the only real bonds that occur are brokered on the floor of the stock exchange, where men huddle in a frenzy of money - perhaps the abiding image of the decade that followed.

Politically, the pictures are satisfied to set up simple dialectics: between the animation in the blur of City dealing rooms and the slow grind of the rest of society, where winos sleep on steps or slug quietly at bottles, and almost everyone else, including our two heroes, of course, are still as statues. Or between the thrust of brutalist architecture - the NatWest building emerges from its sheath of scaffolding - and the population's downcast stares. Or between the silhouettes of toy soldiers - who seem to pose the veterans' question: is this what we were fighting for? - and the vacancy of litter-strewn streets.

The anger and violence is as much sexual as political, and mostly imported in the crudeness of the graffiti - though G&G are typically never shy of ramming their point home: Fuck, for example, takes Big Ben as a phallus, and finds possible orifices in the shapes of dirty puddles. Rent boys loiter in doorways in bad check jackets and flares; sex is only ever the half-cocked fantasy scrawled on lavatory walls.

In one of their many manifestos, Gilbert and George noted that what they stood for, above all, was 'more tolerance and more complexity', but the juxtapositions here are the obvious ones and the sense of inclusiveness is sometimes debatable. There are, of course, never any women in their vision, and it is difficult to get around the sense that the black and Asian figures here were being seen by the artists as distinctly alien presences in London's urban landscape.

As a result, this does not feel much like liberating work, worsted as it is by the presence of the artists and hemmed in by their heavy framing. Like the early manifestation of punk, it once contained a real sense of anger, but such outbursts are necessarily of their moment and rarely last. While this series does not seem cartoonish now - in the way, say, that John Lydon's middle-aged snarling from California does - it generally fails to deliver the shock it might once have carried. In place of this outrage you get a kind of formalised despair, as vivid a comment as any perhaps on 1977, but a retrospectively dispiriting one.

Despite all their anti-establishment claims, G&G have always been effective at pushing the right art-world buttons. They were never quite satisfied to be prized for their determined wit, and this collection reveals both the extent and the limits of their serious ambition. Their place in history currently seems assured as the precursor to much of the undirected solipsism and some of the dramatic wit of BritArt, but it is not clear that was ever their intention. The first of the pictures here asks the primary question posed by punk: 'Are you angry or are you boring?'; it is also the question posed by the two men in suits, and the answer, on this evidence, is probably a bit of both.

· The Observer is media partner of The Dirty Words Pictures, 1997. An evening with Gilbert and George, featuring the artists in conversation with Michael Bracewell, is at the Serpentine Gallery, 14 June, 6-10pm. Tickets: 0207 960 4242